Problem  1  –  Café  Xaragua’s  Second  Year   Rob  Lehnert  and  his  partners  decided  to  proceed  with  their  plans  and  opened  Café  Xaragua.    During  the   first  year,  the  business  performed  almost  exactly  as  they  expected.    During  the  second  year  of   operations,  their  newly  hired  manager  made  some  changes,  which  resulted  in  a  revenue  increase  of  a   little  over  21%,  but  a  decrease  in  gross  margin.    The  partners  hired  a  consultant  who  prepared  the   schedule  that  appears  on  the  following  page.    After  preparing  the  schedule,  the  consultant  disappeared,   so  the  partners  have  hired  you  to  help  them  interpret  the  schedule.    Here  are  their  questions:   1. Wow!    Total  revenues  increased  a  lot!    Are  we  selling  more  of  each  product  than  we  thought  we   would?    How  has  each  product  affected  total  revenues?   2. When  the  new  manager  came  on  board,  he  messed  around  with  selling  prices.    What  was  the   effect  of  the  price  changes  on  the  increase  in  revenues  for  each  product?   3. It  looks  like  our  customers  purchased  a  different  mix  of  product  than  we  expected.    Which   product  was  the  most  different  from  what  we  expected?   4. We’re  really  happy  about  the  big  increase  in  revenues,  but  why  is  the  gross  margin  percentage   less  than  last  year?    Tell  me  how  each  product  contributed  to  the  overall  decline  in  our  expected   gross  margin.   5. What  do  you  think  we  should  do  differently  next  year  to  increase  our  total  gross  margin?    I’m   counting  on  you  to  give  me  very  specific  guidance.   6. Do  your  findings  suggest  that  customers  like  our  strategy  of  providing  a  unique  blend  of   sustainable  coffee  produced  in  Haiti  or  do  they  regard  us  as  just  another  coffee  shop?   Budgeting  and  Management  Control  -­‐  LON   Module  D  -­‐  May  2015   FINAL  EXAM     Café  Xaragua  -­‐  Year  2     Actual     Expected     Difference   Regular  Coffee   $229,950     $150,563     $79,388   Spec  Coffee   $123,188     $200,750     -­‐$77,563   Baked  Goods   $38,325     $125,469     -­‐$87,144   Beans   $388,725     $165,619   ...

1. Problem
1
–
Café
Xaragua’s
Second
Year
Rob
Lehnert
and
his
partners
decided
to
proceed
with
their
plans
and
opened
Café
Xaragua.
During
the
first
year,
the
business

2. performed
almost
exactly
as
they
expected.
During
the
second
year
of
operations,
their
newly
hired
manager
made
some
changes,
which
resulted
in
a
revenue
increase
of
a
little
over
21%,
but
a
decrease

3. in
gross
margin.
The
partners
hired
a
consultant
who
prepared
the
schedule
that
appears
on
the
following
page.
After
preparing
the
schedule,
the
consultant
disappeared,
so
the
partners
have
hired
you
to

4. help
them
interpret
the
schedule.
Here
are
their
questions:
1. Wow!
Total
revenues
increased
a
lot!
Are
we
selling
more
of
each
product
than
we
thought
we
would?
How
has

5. each
product
affected
total
revenues?
2. When
the
new
manager
came
on
board,
he
messed
around
with
selling
prices.
What
was
the
effect
of
the
price
changes
on
the
increase
in
revenues
for

6. each
product?
3. It
looks
like
our
customers
purchased
a
different
mix
of
product
than
we
expected.
Which
product
was
the
most
different
from
what
we
expected?
4. We’re
really
happy
about

7. the
big
increase
in
revenues,
but
why
is
the
gross
margin
percentage
less
than
last
year?
Tell
me
how
each
product
contributed
to
the
overall
decline
in
our
expected
gross
margin.

8. 5. What
do
you
think
we
should
do
differently
next
year
to
increase
our
total
gross
margin?
I’m
counting
on
you
to
give
me
very
specific
guidance.
6. Do
your
findings
suggest
that
customers

9. like
our
strategy
of
providing
a
unique
blend
of
sustainable
coffee
produced
in
Haiti
or
do
they
regard
us
as
just
another
coffee
shop?
Budgeting
and

10. Management
Control
-­‐
LON
Module
D
-­‐
May
2015
FINAL
EXAM
Café
Xaragua
-­‐
Year
2
Actual
Expected

11. Difference
Regular
Coffee
$229,950
$150,563
$79,388
Spec
Coffee
$123,188
$200,750
-­‐$77,563
Baked
Goods

12. $38,325
$125,469
-­‐$87,144
Beans
$388,725
$165,619
$223,106
Total
Revenue
$780,188

13. $642,400
Regular
Coffee
$42,158
$30,113
$12,045

14. Spec
Coffee
$39,420
$40,150
-­‐$730
Baked
Goods
$35,040
$62,734
-­‐$27,694
Beans
$175,200

15. $66,248
$108,953
Total
CGS
$291,818
$199,244
Gross
Profit
$488,370

16. $443,156
Gross
Profit
%
63%
69%
Quantity
Price

17. Variance
Analysis
Revenue
Expected
Actual
Expected
Actual
Actual
Q
x
Actual
P
Price
Variance
Actual
Q
x

18. Expected
P
Usage
Variance
Expected
Q
x
Expected
P
Regular
Coffee
50,188
76,650
$3.00
$3.00
$229,950
$0
$229,950
$79,388
$150,563
Spec

19. Coffee
50,188
32,850
$4.00
$3.75
$123,188
($8,213)
$131,400
($69,350)
$200,750
Baked
Goods
50,188
21,900
$2.50
$1.75
$38,325
($16,425)
$54,750

20. ($70,719)
$125,469
Beans
10,038
21,900
$16.50
$17.75
$388,725
$27,375
$361,350
$195,731
$165,619
Quantity
Cost

21. Variance
Analysis
Expenses
Expected
Actual
Expected
Actual
Actual
Q
x
Actual
P
Price
Variance
Actual
Q
x
Expected
P
Usage

22. Variance
Expected
Q
x
Expected
P
Regular
Coffee
50,188
76,650
$0.60
$0.55
$42,158
$3,833
$45,990
($15,878)
$30,113
Spec
Coffee
50,188

23. 32,850
$0.80
$1.20
$39,420
($13,140)
$26,280
$13,870
$40,150
Baked
Goods
50,188
21,900
$1.25
$1.60
$35,040
($7,665)
$27,375

24. $35,359
$62,734
Beans
10,038
21,900
$6.60
$8.00
$175,200
($30,660)
$144,540
($78,293)
$66,248
Gross
Profit
Expected
Actual

25. Regular
Coffee
$120,450
$187,793
Spec
Coffee
$160,600
$83,768
Baked
Goods
$62,734
$3,285
Beans
$99,371
$213,525
Problem
2
–
Activity-­‐Based
Costing
Using
the

26. information
below,
answer
the
questions
that
follow.
Plumbing
Supply
Company
manufactures
three
products:
Valves,
Pumps
and
“Flowtrollers”
(which
is
patented
and
only
manufactured
by
Plumbing
Supply).
The
most
recent
monthly

27. statement
of
pre-­‐tax
operating
income
appears
below:
Plumbing
Supply
Company
Pre-­‐tax
Operating
Income
-­‐
April
2013
Sales
$1,847,500
100%
Direct
Labor
Expense
$351,000

28. Direct
Materials
Expense
$458,000
Contribution
Margin
$1,038,500
56%
Manufacturing
Overhead
$654,600
35%
Gross
Margin
$383,900
21%
Admin.
Expenses
$350,000
19%
Operating
Income
(pre-­‐tax)
$33,900
1.8%

29. Until
recently,
Plumbing
Supply
allocated
manufacturing
overhead
to
each
product
using
185%
of
direct
labor
costs:
Overhead
Allocated
as
185%
*
Direct
Labor
Cost
Valves Pumps Flowtrollers
Selling
price
$79.00
$70.00
$95.00

30. Direct
material
cost
(DM)
$16.00
$20.00
$22.00
Direct
labor
cost
(DL)
$12.35
$16.25
$13.00
Manuf.
OH
(@185%
*
DL)
$22.85
$30.06
$24.05
Unit
costs
$51.20
$66.31
$59.05

31. Gross
margin
$27.80
$3.69
$35.95
Gross
margin
(%)
35%
5%
38%
The
Company
recently
hired
a
Hult
graduate
who
determined
that
an
activity-­‐based
method
for
allocating

32. overhead
would
provide
a
better
estimate
of
each
product’s
costs
and
computed
the
following
estimates:
Activity-­‐Based
Costing
Valves Pumps Flowtrollers
Selling
price
$79.00
$70.00
$95.00

33. Direct
material
cost
(DM)
$16.00
$20.00
$22.00
Direct
labor
cost
(DL)
$12.35
$16.25
$13.00
Manuf.
OH
(ABC)
$16.87
$19.95
$63.42
Unit
cost
$45.22
$56.20
$98.42

34. Gross
margin
$33.78
$13.80
-­‐$3.42
Gross
margin
(%)
43%
20%
-­‐4%
1. Under
the
previous
method
for
allocating
overhead
(i.e.,
185%
of
Direct
Labor
Costs),
which
product
was
most
profitable?

35. What
is
the
basis
for
your
answer?
2. Under
activity-­‐based
costing,
is
the
same
product
you
identified
above
still
the
most
profitable?
If
not,
what
has
changed?
Explain.

36. 3. Based
on
the
revised
amounts
of
overhead
charged
to
each
product
using
activity-­‐based
costing,
what
conclusion(s)
can
you
draw
about
the
relative
resources
required
to
manufacture
each
product?
(That
is,
compare
the
amount

37. of
resources
necessary
for
each
product.)
4. Does
the
method
of
allocating
overhead
affect
the
company’s
operating
profit?
Explain.
5. What
suggestions
would
you
make
to
management
to
improve
their
overall
profitability?

38. Problem
3
–
Cost
Behavior
and
Break-­‐even
Analysis
Following
the
success
of
the
Norgan
Theatre
in
Minto,
Ontario,
owners
of
another
troubled
theatre
located
in
Texas
decided
to
renovate

39. and
re-­‐open,
hoping
the
enjoy
the
same
success
as
Norgan.
The
owners
of
the
Texas
theatre
put
together
the
following
information
related
to
their
expected
costs
of
running
the
theatre:
Revenue

40. Theatre
admission
Concession
revenue
61.5%
of
theatre
admission
revenue
Total
Revenue

41. Expenses
Film
royalties
30%
of
theatre
admission
revenue
Concession
booth
supplies
45%
of
concession
revenue
Booking

42. service
fees
5%
of
theatre
admission
revenue
Salary
&
wages
11,850
Benefits
1,200
Insurance
3,150
Hydro
&
water

43. 2,950
Depreciation
1,750
Air
conditioning
2,385
Advertising
&
promotion
800
Maintenance
1,750

44. Telephone
750
The
owners
are
unsure
about
the
single
admission
price
they
should
charge
(there
is
only
one
ticket
price).
One
of
the
owners
recalled
having
learned
something
about
break-­‐even
analysis

45. in
graduate
school,
but
didn’t
remember
the
details.
Please
help
out
by
answering
the
questions
below.
1. All
the
expenses
with
numbers
above,
which
total
$26,585,
are
fixed
costs.
What
does
that

46. mean?
2. Why
is
it
necessary
to
know
fixed
costs
in
order
to
determine
a
break-­‐even
point?
3. Contribution
margin
is
defined
as
sales
revenue
less
variable
costs.
Using
the
information

47. above,
write
an
equation
for
the
theatre’s
contribution
margin
where
X=the
revenue
required
for
theatre
admission.
4. Solve
for
the
break-­‐even
level
of
theatre
admission
revenue.
5. The
theatre
owners
are
expecting
2,975
people

48. to
buy
tickets.
If
the
theatre
owners
want
to
charge
a
price
that
results
in
a
profit
of
$5,000,
how
much
should
they
charge
for
each
ticket?

49. Problem
4
–
Short
Answer
Questions
1. Please
answer
the
following
questions:
a. If
a
manufactured
item
has
a
cost
of
$75,
and
if
the
seller
determines
the
price
by
applying
a

50. 25%
markup
over
cost,
what
is
the
selling
price.
Show
your
work!
b. What
is
the
gross
margin
percentage
at
the
price
you
computed
above?
Show
your
work!
c. If
the
seller

51. wishes
to
earn
a
gross
margin
percentage
of
30%,
what
price
should
be
charged
for
the
same
item?
Show
your
work!
2. Why
do
companies
use
predetermined
overhead
rates
to
apply
overhead
to

52. jobs
instead
of
assigning
actual
overhead
to
each
job?
3. We
have
seen
examples
of
companies
using
direct
labor
hours,
direct
labor
dollars
or
machine
hours
as
drivers
for
assigning
overhead.

53. What
factors
should
be
considered
when
choosing
a
driver
for
applying
overhead?
4. Suppose
a
company
purchases
a
raw
material
with
a
cost
of
$100.
During
week
one,
the
material
remains
in

54. the
storeroom
where
it
was
placed
after
purchase.
In
week
two,
the
material
is
used
in
the
manufacture
of
a
widget.
The
widget
is
incomplete
at
the
end
of
week
two.

55. The
widget
is
completed
in
week
three
and
placed
on
a
showroom
shelf.
A
customer
purchases
the
widget
in
week
four.
Explain
where,
in
the
financial
statements,
the
$100
associated
with
that

56. raw
material
would
appear
in
the
income
statement
and/or
balance
sheet
in
weeks
one,
two
three
and
four,
if
financial
statements
were
prepared
at
the
end
of
each
week.
5. Suppose
you
were

57. the
project
manager
for
advertising
for
a
major
international
concert
in
a
remote
city.
When
the
project
stated,
you
projected
total
advertising
revenue
of
$800
million
from
sponsors.
When
you
priced
the

58. advertising,
you
expected
the
cost
of
providing
the
advertising
to
be
$775
million;
however,
you
have
recently
learned
that
the
cost
of
broadcasting
from
a
remote
city
will
be
more
than
you
anticipated.

59. If
your
pay
was
based
on
advertising
profitability,
what
would
you
do
about
this
new
information?